Asstt. Dir. It (Exemption) vs Prakash Education Society
2004 Latest Caselaw 586 Del

ORDER

Pradeep Parikh, A.M.:

Both these appeals by the department are directed against two separate orders of the learned Commissioner (Appeals), dated 13-8-1998 and 20-5-1999, for assessment years 1995-96 and 1996-97, respectively. As the issues involved in both the appeals are common, we find it convenient to dispose of both the appeals together by this combined order. The main grievance of the department in both the appeals is against allowing the benefit of section 10(22) of the Income Tax Act, 1961 (herein after referred to as the Act), to the assessed.

2. The assessed is a trust and had declared nil income in both the years under consideration. It is registered society engaged in the running of residential school by the name G.D. Birla Memorial School at Ranikhet. As per its income and expenditure account, the assessed had a total income of Rs. 1,99,64,443. As against this, it had debited expenses amounting to Rs. 1,47,04,829. On perusal of the income and expenditure account, it was seen by the assessing officer that besides having income by way of tuition and board fees, the assessed also had a dividend income of Rs. 56,00,000 and interest income of Rs. 4,37,046. On perusal of the details of investment, it was found by the assessing officer that substantial portion of the assessed's liquid funds were invested in equity shares valued at Rs. 4,73,30,586. It was also observed by the assessing officer that the assessed was holding substantial shares and debentures in such companies where some of its managing committee members had substantial interest. Even during the year under consideration, the assessed had invested its entire surplus in the purchase of 10,00,000 preference shares in such companies. The assessed was asked to show as to how the investment in the shares of these companies could be said to be for the purposes of the attainment of its aims and objects. The explanation of the assessed was that it was considered to be a sound investment. Perusal of the books of account also showed that substantial funds had been transferred from the bank account for the purchase of shares in various companies. Considering these facts, the assessing officer held that the assessed had diverted its funds for the purpose of profit and also for benefiting the business interest of the members of its managing committee. According to him, since the funds were utilised for non-educational purposes, it was held that the assessed-society was not existing solely for educational purposes but for profits also. Accordingly, exemption under section 10(22) of the Act was denied to the assessed. Similar were the facts in assessment year 1996-97 and the benefit of section 10(22) was denied for that year as well. For both the years under appeal, the total income of the assessed was assessed at Rs. 88,69,610 and Rs. 1,17,43,470 respectively.

2. The assessed is a trust and had declared nil income in both the years under consideration. It is registered society engaged in the running of residential school by the name G.D. Birla Memorial School at Ranikhet. As per its income and expenditure account, the assessed had a total income of Rs. 1,99,64,443. As against this, it had debited expenses amounting to Rs. 1,47,04,829. On perusal of the income and expenditure account, it was seen by the assessing officer that besides having income by way of tuition and board fees, the assessed also had a dividend income of Rs. 56,00,000 and interest income of Rs. 4,37,046. On perusal of the details of investment, it was found by the assessing officer that substantial portion of the assessed's liquid funds were invested in equity shares valued at Rs. 4,73,30,586. It was also observed by the assessing officer that the assessed was holding substantial shares and debentures in such companies where some of its managing committee members had substantial interest. Even during the year under consideration, the assessed had invested its entire surplus in the purchase of 10,00,000 preference shares in such companies. The assessed was asked to show as to how the investment in the shares of these companies could be said to be for the purposes of the attainment of its aims and objects. The explanation of the assessed was that it was considered to be a sound investment. Perusal of the books of account also showed that substantial funds had been transferred from the bank account for the purchase of shares in various companies. Considering these facts, the assessing officer held that the assessed had diverted its funds for the purpose of profit and also for benefiting the business interest of the members of its managing committee. According to him, since the funds were utilised for non-educational purposes, it was held that the assessed-society was not existing solely for educational purposes but for profits also. Accordingly, exemption under section 10(22) of the Act was denied to the assessed. Similar were the facts in assessment year 1996-97 and the benefit of section 10(22) was denied for that year as well. For both the years under appeal, the total income of the assessed was assessed at Rs. 88,69,610 and Rs. 1,17,43,470 respectively.

3. The Commissioner (Appeals) observed in his order for assessment year 1995-96 that the assessed had not done any business but had made investment in shares for fruitful returns to be utilised for educational purposes only. He also found that the surplus which accrued to the school had been utilised only for educational purposes. Similar were the observations in the order for assessment year 1996-97 also. Hence, in both the years the Commissioner (Appeals) directed the assessing officer to allow exemption under section 10(22) of the Act to the assessed.

3. The Commissioner (Appeals) observed in his order for assessment year 1995-96 that the assessed had not done any business but had made investment in shares for fruitful returns to be utilised for educational purposes only. He also found that the surplus which accrued to the school had been utilised only for educational purposes. Similar were the observations in the order for assessment year 1996-97 also. Hence, in both the years the Commissioner (Appeals) directed the assessing officer to allow exemption under section 10(22) of the Act to the assessed.

4. The learned Departmental Representative referred to the facts mentioned by the assessing officer in his order and our particular attention was drawn to the fact that out of the various sources of income which the assessed had, huge surplus had been generated and the same had been utilised for the purposes of applying for shares. It was submitted that the society was charging exhorbitant fees for tuition, it still applied for shares and generated huge surplus by way of dividend and interest. Since the surplus was not solely used for educational purposes, the assessed was liable to lose the benefit of section 10(22) of the Act. It was pointed out that as a matter of fact, by applying for the shares of various companies, it was supporting the cause of those companies in which the members of the managing committee of the society were directly or indirectly interested. Reliance was placed on the decision of the Supreme Court in the case of Aditanar Educational Institute & Ors. v. Addl. CIT (1997) 224 ITR 310 (SC).

4. The learned Departmental Representative referred to the facts mentioned by the assessing officer in his order and our particular attention was drawn to the fact that out of the various sources of income which the assessed had, huge surplus had been generated and the same had been utilised for the purposes of applying for shares. It was submitted that the society was charging exhorbitant fees for tuition, it still applied for shares and generated huge surplus by way of dividend and interest. Since the surplus was not solely used for educational purposes, the assessed was liable to lose the benefit of section 10(22) of the Act. It was pointed out that as a matter of fact, by applying for the shares of various companies, it was supporting the cause of those companies in which the members of the managing committee of the society were directly or indirectly interested. Reliance was placed on the decision of the Supreme Court in the case of Aditanar Educational Institute & Ors. v. Addl. CIT (1997) 224 ITR 310 (SC).

5. The learned counsel. placed before us a chart showing the major sources of income and the expenses incurred there from. For assessment year 1995-96, it was pointed out that the gross income of the assessed was Rs. 1,99,64,443. After deducting dividend and interest income of Rs.. 60,37,086, the assessed was left with the income of Rs. 1,39,27,357. Out of this income, the assessed had incurred expenses to the tune of Rs. 1,47,04,829, thereby leaving a deficit of Rs. 7,77,472. Similarly, in assessment year, 1996-97, after ignoring, dividend and interest income, the assessed was left with a meagre surplus of Rs. 5,51,298. The point the learned counsel was trying to make was that it was a myth on the part of the revenue authorities to conclude that the assessed was generating huge surplus out of its total income. According to him, the dividend and interest income were incidental incomes only and no adverse inference could have been drawn there from. It was contended that most of the shares were-received as corpus many years back and thereafter based on the original share holding, the assessed had acquired more shares by way of rights, bonus, etc. With, regard to the purposes of making investment in shares it was contended that the returns there from were utilised for educational purposes only. It was further contended that restriction as regards investment in specified securities which were imposed by sections 11 and 12 of the Act, did not apply to the provisions of section 10(22) of the Act. As regards the allegations that the society as well as companies, the shares of which were acquired by the society, were controlled by Birla Family it was submitted that Shri B.K. Birla had no substantial interest in any company and that no other member of the Birla family except Mr. B.K. Birla. was on the governing board of the society. Reliance was placed on the decisions in Governing Body of Rangaraya Medical College v. ITO (1979) 117 ITR 284 (AP), Gujarat State Co-operative Union v. CIT (1992) 195 ITR 279 (Guj), ITO v. Model Institute of Education & Research (2001) 77 ITD 375 (Asr), Birla Vidhya Vihar Trust v. CIT (1982) 136 ITR 445 (Cal), CIT v. Academy of General Education (1984) 150 ITR 135 (Karn), Shree Education Society v. Asstt. Director of IT (Exemption) (2003) 80 TTJ (Cal) 365 : (2003) 85 ITD 288 (Cal), Secondary Board of Education v. ITO (1972) 86 ITR 408 (Ori), CIT v. Kshatriya Girls Schools Managing Board (2000) 245 ITR 170 (Mad), Brahmin Educational Society v. Asstt. CIT & Anr. (1997) 227 ITR 317 (Ker), CIT v. AMM. Arunachalam Educational Society (2000) 243 ITR 229 (Mad) and Thiagarajar Charities v. Addl. CIT & Anr. (1997) 225 ITR 1010 (SC).

5. The learned counsel. placed before us a chart showing the major sources of income and the expenses incurred there from. For assessment year 1995-96, it was pointed out that the gross income of the assessed was Rs. 1,99,64,443. After deducting dividend and interest income of Rs.. 60,37,086, the assessed was left with the income of Rs. 1,39,27,357. Out of this income, the assessed had incurred expenses to the tune of Rs. 1,47,04,829, thereby leaving a deficit of Rs. 7,77,472. Similarly, in assessment year, 1996-97, after ignoring, dividend and interest income, the assessed was left with a meagre surplus of Rs. 5,51,298. The point the learned counsel was trying to make was that it was a myth on the part of the revenue authorities to conclude that the assessed was generating huge surplus out of its total income. According to him, the dividend and interest income were incidental incomes only and no adverse inference could have been drawn there from. It was contended that most of the shares were-received as corpus many years back and thereafter based on the original share holding, the assessed had acquired more shares by way of rights, bonus, etc. With, regard to the purposes of making investment in shares it was contended that the returns there from were utilised for educational purposes only. It was further contended that restriction as regards investment in specified securities which were imposed by sections 11 and 12 of the Act, did not apply to the provisions of section 10(22) of the Act. As regards the allegations that the society as well as companies, the shares of which were acquired by the society, were controlled by Birla Family it was submitted that Shri B.K. Birla had no substantial interest in any company and that no other member of the Birla family except Mr. B.K. Birla. was on the governing board of the society. Reliance was placed on the decisions in Governing Body of Rangaraya Medical College v. ITO (1979) 117 ITR 284 (AP), Gujarat State Co-operative Union v. CIT (1992) 195 ITR 279 (Guj), ITO v. Model Institute of Education & Research (2001) 77 ITD 375 (Asr), Birla Vidhya Vihar Trust v. CIT (1982) 136 ITR 445 (Cal), CIT v. Academy of General Education (1984) 150 ITR 135 (Karn), Shree Education Society v. Asstt. Director of IT (Exemption) (2003) 80 TTJ (Cal) 365 : (2003) 85 ITD 288 (Cal), Secondary Board of Education v. ITO (1972) 86 ITR 408 (Ori), CIT v. Kshatriya Girls Schools Managing Board (2000) 245 ITR 170 (Mad), Brahmin Educational Society v. Asstt. CIT & Anr. (1997) 227 ITR 317 (Ker), CIT v. AMM. Arunachalam Educational Society (2000) 243 ITR 229 (Mad) and Thiagarajar Charities v. Addl. CIT & Anr. (1997) 225 ITR 1010 (SC).

6. We have considered the rival contentions and the material on record. There is no dispute with regard to the facts narrated above. The only question before us is whether the assessed is existing solely for educational purposes and not for purposes of profit. There cannot be any quarrel over the proposition that the availability of exemption under section 10(22) of the Act has to be evaluated from year to year as was contended by the learned Departmental Representative and as has been held by the Supreme Court in the case of Aditanar Educational Tuition (supra). However, in the same decision it has been held by the Supreme Court that while evaluating the eligibility for exemption under section 10(22), one should not be unrealistic and hyper-technical. In that case, the voluntary contributions received by the assessed were not offered for taxation. The Commissioner (Appeals) invoking the revisional power under section 263 observed that exemption under section 10(22) would apply to educational institution and not to any one who might be financing the running of such an institution. Of course, the allegation in the present case is not that the assessed is engaged in financing the educational institution, but the point we want to drive home is that while evaluating the eligibility, one should not be hyper-technical. In our opinioni the assessing officer in the present case has tried to be such. One of the features noted by the assessing officer was that in assessment year 1995-96, the assessed earned dividend amounting to Rs. 56,00,000 and interest amounting to Rs. 4.37 lakhs. It has been held by the Madras High Court in the case of CIT v. A.M.M. Arnachalam Education Society (supra), that the source from which the money is received is of no consequence, what is relevant is the application of money towards the object of the institution. Even as regards application, it has been pointed out by the assessing officer that the assessed invested its entire surplus in the purchase of 10,00,000 preference shares of Rajeshwari Polyfil Ltd. and 1,57,660 shares of Keshoram Ind. Ltd. valued at Rs. 31,53,200. However, the assessing officer has completely ignored the fact that the assessed has applied funds to the extent of Rs. 1,47,04,829 towards the running of the educational institution. Thus, it is not realistic to say that the assessed had invested its entire surplus for the purchase of shares. At this juncture, it has to be mentioned that one cannot lose sight of the legislative intent that in order to claim exemption under section 10(22) of the Act, the predominant object has to be kept in view. If the predominant object of the institution is that of educational purposes, then, in the process if the institution earns some surplus in the carrying out of its predominant activity, it will not lose its original character of being in existence for educational purposes. Further, if the assessed has invested its funds to get better returns which in turn are to be utilised for educational purposes then exemption under section 10(22) of the Act cannot be denied. It was so held by the Madras High Court in the case of CIT v. Kshatriya Girls School (supra). In the present case, there is no allegation that the assessed-society was existing mainly for the purposes of investing in shares and earning income by way of dividend and interest. It is only an inference drawn by the assessing officer merely on the basis of huge amount of dividend and interest earned by the assessed and investment made by it. Even as regards investments made, it has to be appreciated that most of the shares held by the assessed were received by it as donation to the corpus in earlier years. The holding of these shares further entitled the assessed in right and bonus shares. If those shares are earning good dividend for the assessed which in turn are being utilised for educational purposes, then we see nothing wrong in applying certain funds for investment in right shares. Thus, considering the overall facts and circumstances of the case and also considering the various judicial pronouncements relied upon by the learned counsel, we are of the view that the assessed- society was existing solely for educational purposes and hence, exemption under section 10(22) cannot be denied to it. Accordingly, we uphold the order of the Commissioner (Appeals) on this issue for both the years under appeal.

6. We have considered the rival contentions and the material on record. There is no dispute with regard to the facts narrated above. The only question before us is whether the assessed is existing solely for educational purposes and not for purposes of profit. There cannot be any quarrel over the proposition that the availability of exemption under section 10(22) of the Act has to be evaluated from year to year as was contended by the learned Departmental Representative and as has been held by the Supreme Court in the case of Aditanar Educational Tuition (supra). However, in the same decision it has been held by the Supreme Court that while evaluating the eligibility for exemption under section 10(22), one should not be unrealistic and hyper-technical. In that case, the voluntary contributions received by the assessed were not offered for taxation. The Commissioner (Appeals) invoking the revisional power under section 263 observed that exemption under section 10(22) would apply to educational institution and not to any one who might be financing the running of such an institution. Of course, the allegation in the present case is not that the assessed is engaged in financing the educational institution, but the point we want to drive home is that while evaluating the eligibility, one should not be hyper-technical. In our opinioni the assessing officer in the present case has tried to be such. One of the features noted by the assessing officer was that in assessment year 1995-96, the assessed earned dividend amounting to Rs. 56,00,000 and interest amounting to Rs. 4.37 lakhs. It has been held by the Madras High Court in the case of CIT v. A.M.M. Arnachalam Education Society (supra), that the source from which the money is received is of no consequence, what is relevant is the application of money towards the object of the institution. Even as regards application, it has been pointed out by the assessing officer that the assessed invested its entire surplus in the purchase of 10,00,000 preference shares of Rajeshwari Polyfil Ltd. and 1,57,660 shares of Keshoram Ind. Ltd. valued at Rs. 31,53,200. However, the assessing officer has completely ignored the fact that the assessed has applied funds to the extent of Rs. 1,47,04,829 towards the running of the educational institution. Thus, it is not realistic to say that the assessed had invested its entire surplus for the purchase of shares. At this juncture, it has to be mentioned that one cannot lose sight of the legislative intent that in order to claim exemption under section 10(22) of the Act, the predominant object has to be kept in view. If the predominant object of the institution is that of educational purposes, then, in the process if the institution earns some surplus in the carrying out of its predominant activity, it will not lose its original character of being in existence for educational purposes. Further, if the assessed has invested its funds to get better returns which in turn are to be utilised for educational purposes then exemption under section 10(22) of the Act cannot be denied. It was so held by the Madras High Court in the case of CIT v. Kshatriya Girls School (supra). In the present case, there is no allegation that the assessed-society was existing mainly for the purposes of investing in shares and earning income by way of dividend and interest. It is only an inference drawn by the assessing officer merely on the basis of huge amount of dividend and interest earned by the assessed and investment made by it. Even as regards investments made, it has to be appreciated that most of the shares held by the assessed were received by it as donation to the corpus in earlier years. The holding of these shares further entitled the assessed in right and bonus shares. If those shares are earning good dividend for the assessed which in turn are being utilised for educational purposes, then we see nothing wrong in applying certain funds for investment in right shares. Thus, considering the overall facts and circumstances of the case and also considering the various judicial pronouncements relied upon by the learned counsel, we are of the view that the assessed- society was existing solely for educational purposes and hence, exemption under section 10(22) cannot be denied to it. Accordingly, we uphold the order of the Commissioner (Appeals) on this issue for both the years under appeal.

7. In assessment year 1996-97, there is one more ground taken by the department against allowing of depreciation amounting to Rs. 36,00,000. The assessing officer made the impugned disallowance on the ground that the assessed had not shown any income from business or profession. In this regard, reliance has been placed by the learned counsel on the decision in Director of Income-tax (Exemption) v. Lovely Bal Shiksha Parishad (2004) 266 ITR 349 (Del), CIT v. Lagan kala Upvan (2003) 259 ITR 489 (Del) and Radbasomi Satsang v. CIT (1992) 193 ITR 321(SC). As such, the ground becomes academic since we have allowed exemption under section 10(22) to the assessed. Following the decision of the Delhi High Court in the case of CIT v. Lagan Kala Upvan (supra), the claim of the assessed is allowed.

7. In assessment year 1996-97, there is one more ground taken by the department against allowing of depreciation amounting to Rs. 36,00,000. The assessing officer made the impugned disallowance on the ground that the assessed had not shown any income from business or profession. In this regard, reliance has been placed by the learned counsel on the decision in Director of Income-tax (Exemption) v. Lovely Bal Shiksha Parishad (2004) 266 ITR 349 (Del), CIT v. Lagan kala Upvan (2003) 259 ITR 489 (Del) and Radbasomi Satsang v. CIT (1992) 193 ITR 321(SC). As such, the ground becomes academic since we have allowed exemption under section 10(22) to the assessed. Following the decision of the Delhi High Court in the case of CIT v. Lagan Kala Upvan (supra), the claim of the assessed is allowed.

8. In the result, both the appeals of the department are dismissed.

8. In the result, both the appeals of the department are dismissed.